How Stagnant Wages Have Trapped the Housing Market

Prices are up enough to make buying a home too expensive, but still too low to get more homes onto the market. What happens when mortgage rates rise?

NEW YORK (TheStreet) -- In the housing bubble of the past decade one warning sign flashed bright red: Home prices rose faster than incomes. That condition cannot continue for very long before too many prospective buyers can't afford to buy -- the point where the bubble bursts.

On a national basis, this isn't a major problem today, as mortgage rates are low and home prices remain below their bubble-era peaks. But in some markets, especially the large metropolitan areas of California, affordability is becoming an issue, according to Zillow.com, the online housing marketplace.

A survey commissioned by Zillow asked 106 economists why affordability was declining in certain markets. Stagnant income growth was cited as the No. 1 reason by 28% of those who responded, followed by abnormally high rates of home price appreciation at 27% and an abnormally low supply of homes for sale (21%). Other reasons were an insufficient number of homes (13%) and tight credit (11%).

"We're certainly in a better spot than we were just a couple years ago, but the housing market remains far from anyone's definition of 'normal,'" said Zillow Chief Economist Stan Humphries. He said that "despite a generally improving economy, incomes have not risen at the same level as home values and rents, leading people to spend an ever-larger share of their pay on housing. It will take years for these issues to either be adequately addressed through policy, or to naturally work themselves out of the market."